Sebi-RBI meet on margin trading today

Our Markets Bureau

Mumbai, Sept 17: The Securities and Exchange Board of India (Sebi) got into overdrive on Monday in a bid to revive market sentiment and inject liquidity into the bourses.

Sebi said the Standing Technical Committee of Sebi and the Reserve Bank of India (RBI) will meet Tuesday to discuss the modalities of introducing margin trading on the Indian stock exchanges. The market regulator has also asked stock exchanges to submit to it detailed plans on when they intend to commence trading in stock futures.

These decisions came after a day of hectic deliberations at Sebi’s Mittal Court headquarters in south Mumbai. The Sebi board had recently cleared 31 stocks in-principle for stock futures trading.
The Sebi advisory group on derivatives, which met on Monday, decided to have some essential pre-requisites like proper risk containment measures and surveillance systems before stock futures trading commences on the markets.

Prof JR Varma, of the advisory group, said individual stock futures to be allowed on the derivatives segment would be cash-settled and a majority of the risk containment measures would be similar to those in existence for options in individual stocks (OIS). These would then become delivery-settled after three to four months. There would also have to be stricter position limits imposed both at client/customer level and trading member level. Position limits would be applied on aggregate positions and controlled at trading member level as well as client level, he said.

“The aggregate position of clients per broker should not exceed 5 per cent of the aggregate open position in the market or 1 per cent of the market capitalisation of the company initially,” Prof Varma said.

The National Stock Exchange (NSE) and The Stock Exchange, Mumbai (BSE) have told Sebi that they are in a position to launch stock futures in a month’s time. Sebi chairman Devendra Raj Mehta said after the Sebi board clears the exchanges’ proposals, trading can commence within four to six weeks.

The group also suggested that there were other steps which also needed to be urgently taken up for the healthy growth and development of the stock futures market, like equal access and level playing field to all set categories of investors, including foreign institutional investors (FIIs), mutual funds and retail investors. These investors should be allowed to trade in the derivatives market to add depth to the market. At present, FIIs are allowed to participate in the derivatives segment only in products like index futures and their exposure limits are equivalent to their exposure in the cash segment of the equities market.

The panel also discussed the proposal of margin trading submitted by the Securities Industry Association, which is under incorporation. Further clarifications were sought on the proposal and suggestions on other models of margin trading were also considered. These proposals would figure in Tuesday’s meeting of the Sebi-RBI panel.

Mr Mehta said the panel is likely to deliberate on three options for margin trading: either the funds should be routed through the clearing corporations, or a special purpose vehicle should be floated for margin trading by brokers or stock exchanges. The third option, based on the US model, could be one where 50 per cent of the amount of the trade is paid by the client and the rest is paid by the broker, who in turn borrows these funds from high net-worth individuals or from banks.